>MARICO INDUSTRIES: Robust operational performance; RM tailwinds ahead

■ Strong operational performance; 16% domestic volume growth: Marico reported strong operational Q3Y12 performance, with 16% domestic volume growth (13% overall) and 300bps gross margin expansion being the key highlights. Notwithstanding the price hikes in its core brands and general inflationary headwinds to consumer wallets, volume growth of 16% reinforces MRCO’s dominant brand franchise. Sales, EBITDA and PAT came in at Rs10.56bn (up 29% YoY), Rs1.22bn (up 22.1% YoY) and Rs841m (up 21%YoY), against our expectations of Rs10bn, Rs1.19bn and Rs810m, respectively. Recurring PAT adjusted for exceptional grew solid 25%. Parachute, Saffola and Value-added hair oils posted 13%, 15% and 2% volume growth, while Kaya reported 15% same store clinic growth. International division delivered 16% organic revenue growth.


■ Softening in RM and price hikes boost gross margins: With high RM in the base and softening in Copra (down 9% QoQ), standalone as well as consol gross margins expanded 300bps (consol gross margins up 120bps YoY). Like to like EBITDA margins (adjusting for Rs96m as excise provisioning in Q3FY11) contracted ~200bps driven by higher ad-spends (up170bps). Current quarter also contains a charge of Rs129m in Kaya Middle East, pertaining to misstatement of expenses related to earlier years, thus, resulting in
consequent overstatement of Kaya profitability in the relevant period. As per the management, appropriate action has been taken for this lapse and monitoring process has been further strengthened.


■ Maintain ‘Accumulate’: MRCO’s continued strong volume driven performance, despite the aggressive price hikes (taken in 2HFY11) and turn-around in RM dynamics, creates a good tailwind for EPS upgrades, going forward. However, current valuations at 23.6x FY13e is fair, in our view. Maintain ‘Accumulate’, with a revised Mar-13 TP of Rs170. Turnaround in Copra price trajectory is the key risk.


RISH TRADER

>BANK OF BARODA: 3QFY12 earnings surprised

■ 3QFY12 earnings surprised on the downside across most operating metrics, be it margins, CASA or provisions, except other income which saw sizable trading gains. As a result, the stock ended down 1.2% over yesterday but almost 3% down from pre-results levels today.


■ Highlights: While loan growth came in surprisingly high at 26% driven partly by a translation
effect of the international book and by corporate and farm credit, CASA mix came off
marginally to 27.2% as did margins down 8bp to 2.99% (in fact, domestic margins came off
16bp to 3.51% led by flattening yields but a continued rise in funding costs). Gains on sale of
liquid mutual fund holdings and FX gains along with muted opex growth helped boost
operating profits. However, a significant 27% sequential increase in restructured loans
(telecom infra sector) as well as rising slippages to 1.6% - the highest in the last 3 years – put a dampener on stock sentiment, although pre-tax earnings grew at a reasonable 14% yoy.


■ Earnings outlook: We factor in 20-22% loan growth with slightly lower margins and rising
credit costs up to FY13e, resulting in 14% and 15% earnings growth in FY12e and FY13e.
However, growth recovers to 26% yoy in FY14e. Clearly, restructured loans are likely to be in
focus for most PSU banks with specific sectoral issues facing the power, airlines and exportrelated sectors.


■ We downgrade to N from OW with a TP of INR889 from INR961: BoB is currently trading at FY13E multiples of 5.6x PE and 1.1x PB, a c9% and 26% premium to its peers (ex- SBI). Given the macro uncertainty and unfolding asset quality risks, we are cutting our target PE and PB multiples to 5-year average levels of 5.5x and 1x respectively from 6.3x PE and 1.2x PB earlier. Our revised price target is INR889, implying potential return (including dividends) of 15.1%. We downgrade the stock from OW to Neutral. We expect the valuation premium to peers will compress as Bank of Baroda’s relatively better-than-peer book quality is showing chinks in the armour. Key downside risk: Management change in Nov-12 


(Chairman retiring). Key upside risk: Fewer asset quality issues than expected.


RISH TRADER

>GRASIM INDUSTRIES:

Grasim Industries’ Q3FY12 consolidated results were largely in line with our estimates with EBITDA at Rs13.9bn, 6.4% above our estimates and adjusted PAT at Rs5.6bn, 3.4% lower than estimates. On standalone basis, the operating margin (22.7% vs. 29.9% in Q3FY11) was under pressure primarily due to decline in VSF sales (7.6% YoY decline) and increase in input costs. Though VSF prices improved 3.1% QoQ to Rs128.5/kg, it could be under pressure going forward if the demand condition does not improve. The management has given a cautious outlook for both the key businesses Cement (surplus scenario to exist for 2-3 years and overall margins are under pressure due to rising input costs) and VSF (In the short-to-mid term, demand is expected to be volatile due to macro economic conditions and Euro Zone uncertainties). Considering the cautious stance of the management and the absence of near-term catalysts, we retain our Hold rating on the stock with TP of Rs2,377.


■ Improvement in consolidated profit led by strong growth in the cement business: Consolidated revenue increased 16.3% YoY to Rs62.6bn led by strong 23.1% growth recorded in the cement business by its subsidiary, Ultra Tech. Driven by higher domestic realization (20.1% YoY) of cement, consolidated EBITDA increased 16.9% YoY to Rs13.1bn and adjusted PAT increased 12.4% YoY to Rs5.6bn.


■ Operating margin under pressure in the VSF business: Revenue from VSF segment declined 3.9% YoY to Rs10.9bn primarily due to 7.6% YoY decline in VSF sales volume to 78,215tonnes. VSF realization increased 4.4% YoY (and 3.1% QoQ) to Rs128.5/kg. Led by lower sales volume and higher input costs (sulphur price and energy cost), EBITDA from VSF segment declined 28.5% YoY to Rs2.8bn. EBITDA margin from VSF segment declined 9pp YoY to 25.3%.


■ Operating results for standalone business disappoints: Led by lower operating profit of VSF segment, standalone EBITDA declined 22.8% YoY to Rs2.8bn. Standalone EBITDA margin declined 7.3pp YoY to 22.7%. Despite weak operating performance, higher other income (up 35.4% YoY) coupled with lower interest burden (down 39% YoY) and tax rate (21.8% vs. 27.8% in Q3FY11) restricted marginal drop by 2.9% at PAT levels.


■ Cautious management commentary on key business segments: The management gave a cautious outlook for key business segments, Cement and VSF. For Cement, it believed the oversupply will persist in the industry for the next two-three years and at the same time, rising input costs will put pressure on margins. In the VSF business, it believed that in the short-to-mid term, demand will be volatile due to macro economic conditions and Euro Zone uncertainties.


■ Near-term catalysts missing, maintain Hold: At the CMP of Rs2,485, the stock trades at 11.6x FY13E EPS, 4.5x EV/EBITDA and 1.4x P/BV. The company’s both the key businesses (Cement and VSF) are under pressure and we don’t foresee any near term catalyst for the stock. Hence, we maintain our Hold rating with a target price of Rs2,377.


RISH TRADER

>Dr. Reddy's Labs: Windfall from generic Zyprexa (olanzapine); DRL launched 33 generic products in the US market

Dr. Reddy’s Labs (DRL) reported excellent results for Q3FY12 due to $99mn(Rs4.55bn) revenues from 180-days exclusivity of generic olanzapine in the US. The company’s revenues grew by 46%YoY, EBIT margin improved by 1190bps and net profit grew by 88%YoY. The company is also likely to report similar results in  Q4FY12 due to generic olanzapine opportunity. However, the company reported moderate growth in other markets. We have revised our rating from Hold to Buy with a revised target price of Rs1885 (based on 24x FY13 EPS+FTF).


■ Windfall from generic olanzapine: During the quarter, DRL reported $99mn (Rs4.55bn) revenues from 180-day exclusivity of generic olanzapine in the US. The company launched 20mg version of generic olanzapine in October’11 in the US. DRL is also likely to report similar growth in Q4FY12 due to the remaining period of exclusivity. Excluding generic olanzapine, the sales growth was 22%. The company is likely to benefit from 40 Para IV and 10 FTF opportunities in the US.


■ Moderate growth in other markets: DRL’s global generic business (77% of revenues) grew by 57%YoY from Rs13.59bn to Rs21.29bn. Its PSAI business (20% of revenues) grew by 12%YoY from Rs4.98bn to Rs5.56bn. DRL’s proprietary business (3% of revenues) grew by 102%YoY from Rs417mn to Rs842mn. Global generic growth rates in various geographies were: N. America 133% (due to generic olanzapine), Europe 14%, India 11%, Russia & CIS 15% and others 34%. For PSAI business the growth rates were: N. America 52%, Europe -10%, India 39% and others 7%.


■ EBIT margin improves by 1190bps: DRL reported 1190 bps YoY improvement in EBIT margin from 15.4% to 27.3% mainly due to the high margin generic olanzapine opportunity in the US.


■ New product launches: During Q3FY12, DRL launched 33 generic products in the US market. The company filed 7 DMFs and 16 ANDAs with US FDA. The company has one of the richest pipelines of ANDAs. It has a total of 187 ANDA filings, 79 pending ANDAs with US FDA of which 40 are Para IV and 10 FTF opportunities. DRL had strong volume growth across key products namely lansoprazole, tacrolimus, omeprazole Mg OTC in the US market. The company’s 26 products feature among the top 3 in MS in the US.


■ Mexico facility still under US FDA scanner: DRL’s API facility at Mexico continues to be under US FDA scanner and awaiting re-inspection by US FDA.


■ Upgrade from Hold to Buy: We have revised our EPS estimates upwards for FY12 and for FY13 by 32% and 17% respectively due to higher sales of generic olanzapine. We expect the company to benefit from the good growth of generic olanzapine in US in Q4FY12 and from 40 Para IV and 10 FTF opportunities in the US. At the CMP of Rs1670, the stock trades at 18.4x FY12E EPS of Rs90.5 and 18.6x FY13E EPS of Rs89.9. We have revised our rating from Hold to Buy with a target price of Rs1885 (based on 24x FY13E EPS+FTF).


RISH TRADER